Latest update April 23rd, 2024 12:59 AM
Aug 08, 2014 Editorial
For over two decades, in our quest for growth, we followed the triple commandments of the ‘Washington Consensus’ –”stabilise, liberalise, and privatise” – in order to attract Foreign Direct Investment (FDI). The results, while steady, have not been exactly stellar.
From our perspective as a developing country, FDI is of significance only if it creates employment as well as provides capital for development. However, since Trans-National Corporations prefer to invest in the modern sectors of the economy – which demands relatively more skilled personnel than we have at present – our employment needs go unfulfilled.
As regards capital, Foreign Direct Investment makes only marginal contributions in capital formation. Actually, in the equation of growth and investment, growth is a crucial determinant of FDI itself. The question therefore, is whether developing countries commercially grow as a result of the contribution of such investments or they grow first in order to attract them?
The evidence shows that FDI tends to gravitate towards countries that are stable and have efficient infrastructure – neither of which we are blessed with. Economic growth, on the other hand, seems to increase with greater trade openness instead of FDI inflows. The mission ahead lies in making strategic use of investment for our development needs. So far, the evidence indicates that there are difficulties in deriving macro-economic benefits from most FDI, as well as to get them into our area of comparative advantage – agriculture.
Our FDI is highly concentrated in three sectors: telecommunications, financial services and mining. Our land, labour and capital are not fully developed for the advanced sector investment. Therefore technology transfer as well as employment generation has proven to be a myth. In addition, these companies charge high management and service costs in the name of technological transfer, but actually they use it to lower their taxes and enhance their profits. In fact these FDIs have no commitment for technology transfer to the host country.
The ultimate goal of domestic growth will be achieved only if the investment is not volatile. The investment in infrastructure, agriculture and manufacturing sectors will support export-led growth. That is the reason why, neither the countries which developed in the 19th century like, Germany, US or Japan, nor the countries that developed in 19th and 20th centuries, like Russia, China and Korea, placed Foreign Direct Investment as central to their development strategy, because benefits and costs are unevenly distributed between the sender and receiver.
Though one can point to the success of the East Asian “tigers” as due to the attraction of foreign investment, what must be appreciated is that Malaysia, South Korea, China and Japan have made technology transfer as a performance requirement, along with strong regulations of the markets. In addition to maintaining macro-economic stability, all high-growth countries capitalised the foreign investment benefit by having protectionist measures, to attract foreign investment and to spur export-oriented growth at the same time.
Nevertheless, this does not suggest that we take a regressive trade policy, but rather, to take advantage of the opportunity of economic globalisation. The agriculture sector has rightfully been identified as the fulcrum of growth in the near term and an ambitious diversification programme has been embarked upon in this area – especially non-traditional crops. We cannot lose in this area but we cannot wait on Foreign Direct Investment.
We predict, in line with our observation above, that when growth is demonstrated here, the Foreign Direct Investment will arrive. But we will have to ensure that those investing follow our development strategy.
In conclusion, it is suggested that for us, in the long run, foreign capital is no panacea for sustainable development and growth, given our industrial, institutional and human resource constraints, and will have no ultimate correlation with economic growth, unless we are able to capitalise FDI for competitive advantages and export-led growth. To believe otherwise will only ensure that we end up simply as a facilitator for other players.
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